Question & Answer

Explain how the yield on a foreign money market security would be affected if the foreign currency denominating that security declined to a significant degree. (LO3)

Explain how each of the following would use banker’s acceptances: (a) exporting firms, (b) importing firms, (c) commercial banks, and (d) investors. (LO1)

Based on what you know about repurchase agreements, would you expect them to have a lower or higher annualized yield than commercial paper? Why? (LO1)

How can small investors participate in investments in negotiable certificates of deposits (NCDs)? (LO1, LO2)

Explain how investors’ preferences for commercial paper change during a recession. How would this reaction affect the difference between commercial paper rates and T-bill rates during recessionary periods? (LO1)

Why do ratings agencies assign ratings to commercial paper? (LO1)

Who issues commercial paper? Which types of financial institutions issue commercial paper? Why do some firms create a department that can directly place commercial paper? Which criteria affect the decision to create such a department? (LO1)

Describe the activity in the secondary T-bill market. How can this degree of activity benefit investors in T-bills? Why might a financial institution sometimes consider T-bills as a potential source of funds? (LO1)

How can investors using the primary T-bill market be assured that their bid will be accepted? Why do large corporations typically make competitive bids rather than noncompetitive bids for T-bills? (LO1)

Explain how the Treasury uses the primary market to obtain adequate funding from the U.S. government. (LO1)

The Fed attempts to use monetary policy to control the level of inflation and economic growth in the United States. Write a short essay on how the government’s fiscal policy can make the Fed’s role more difficult. Specifically, assume that the administration plans to implement a new program that will expand the government benefits provided to most people in the country. The new program will likely increase the budget deficit. Discuss the impact of this policy on interest rates and explain how this makes the Fed’s role more challenging. 

During the coronavirus pandemic, between 2020 and 2022, the Fed implemented two different monetary policies. Explain the circumstances that led the Fed to change the monetary policy. (LO2; LO3)

Which circumstances might cause a stimulative monetary policy to be ineffective? (LO2)

Explain the effects of a stimulative monetary policy on a firm’s cost of capital. (LO2) 

Why might the Fed want to focus its efforts on reducing long-term interest rates rather than short-term interest rates during a weak economy? Explain how it might use a monetary policy focused on influencing long-term interest rates. Why might such a policy also affect short-term interest rates in the same direction? (LO2)

In a weak economy, the Fed commonly implements a stimulative monetary policy to lower interest rates and presumes that firms will be more willing to borrow money. Even if banks are willing to lend such funds, why might such a presumption about the willingness of firms to borrow be wrong? What are the consequences if the presumption is wrong? (LO2)

Explain why a stimulative monetary policy might not be effective during a weak economy in which there is a credit crunch. (LO2)

During the credit crisis of 2008, the Fed used a stimulative monetary policy. Why do you think the total amount of loans to households and businesses did not increase as much as the Fed had hoped? Are the lending institutions to blame for the relatively small increase in the total amount of loans extended to households and businesses? (LO2)

The Fed uses a targeted federal funds rate when implementing monetary policy. However, the Fed’s main purpose in its monetary policy is typically to have an impact on the aggregate demand for products and services. Reconcile the Fed's targeted federal funds rate with its goal of having an impact on the overall economy. (LO2; LO3)

In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods when home prices increased, homeowners gave credit to the Fed. How can the Fed have such a large impact on home prices? How could news of a substantial increase in the general inflation level affect the Fed’s monetary policy and thereby affect home prices? (LO2; LO3)

Assume the following conditions. The last time the FOMC met, it decided to raise interest rates. At that time economic growth was very strong, so inflation was relatively high. Since the last meeting, economic growth has weakened, and the unemployment rate will likely rise by 1 percentage point over the quarter. The FOMC’s next meeting is tomorrow. Do you think the FOMC will revise its targeted federal funds rate? If so, how? (LO4)

Assume that the Fed adopts an inflation-targeting strategy. Describe how the Fed’s monetary policy would be affected by an abrupt 15 percent rise in oil prices in response to an oil shortage. Do you think an inflation targeting strategy would be more or less effective in this situation than a strategy of balancing inflation concerns with unemployment concerns? Explain. (LO3)

Consider the existing economic conditions, including inflation and economic growth. Do you think the Fed should increase interest rates, reduce interest rates, or leave interest rates at their present levels? Offer some logic to support your answer. (LO2; LO3)

Stock market conditions serve as a leading economic indicator. Assuming the U.S. economy is in a recession, what are the implications of this indicator? Why might this indicator be inaccurate? (LO1)

Consider a discussion during FOMC meetings in which there is a weak economy and a war, with potential major damage to oil wells. Explain why this possible effect would have received much attention at the FOMC meetings. If this possibility was perceived to be highly likely at the time of the meetings, explain how it may have complicated the decision about monetary policy at that time. Given the conditions stated in this question, would you suggest that the Fed use a restrictive monetary policy or a stimulative monetary policy? Support your decision logically and acknowledge any adverse effects of your decision. (LO4)